Due to changes in the law made by the Tax Cuts and Jobs Act (TCJA), the IRS in Notice 2018-14 provided an extended effective period for 2017 Forms W-4 that claimed exemption from income tax withholding for 2017 and allows employees to use the 2017 Form W-4 to claim exemption from withholding in 2018. The notice also makes other changes to rules applicable to the use of Form W-4 to give the IRS time to release an updated Form W-4.
Specifically, the notice provides:
- ·Extends the effective period of Forms W-4, Employee's Withholding Allowance Certificate, furnished to claim exemption from income tax withholding until February 28, 2018, and permits employees to claim exemption from withholding for 2018 by temporarily using the 2017 Form W-4;
- Temporarily suspends the requirement that employees must furnish their employers new Forms W-4 within 10 days of changes in status that reduce the withholding allowances they are entitled to claim;
- Provides that the optional withholding rate on supplemental wage payments is 22 percent for 2018 through 2025; and
- Provides that, for 2018, withholding on periodic payments when no withholding certificate is in effect is based on treating the payee as a married individual claiming three withholding allowances.
As the notice explains:
The Act (TCJA) does not mandate that employees furnish new Forms W-4 for 2018 and expressly permits the IRS to administer income tax withholding under section 3402 for 2018 without regard to the changes in the withholding rules and the suspension of personal exemptions. Accordingly, and in order to minimize burden on employees and employers, the IRS and the Department of the Treasury (Treasury Department) designed the 2018 withholding tables to work with the Forms W-4 that employees have already furnished their employers. See Notice 1036, Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding, and Publication 15 (Circular E), Employer's Tax Guide, for use in 2018. For employees with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding. The revisions are also aimed at avoiding over- and under-withholding of tax as much as possible. The IRS is also working on revising the withholding calculator on www.irs.gov to reflect the changes made by the Act. When released, the modified calculator and 2018 Form W-4 can be used by employees who wish to update their withholding in response to the Act or changes in their personal circumstances in 2018. Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4.
Regarding employees claiming exemption from withholding, the notice provides the following:
With respect to any claim for exemption from withholding for 2018 (whether renewing a claim from 2017 or making a new claim), the IRS will allow employees to claim exemption using the 2017 Form W-4 until 30 days after the 2018 Form W-4 is released in one of the following ways: (1) modifying the 2017 Form W-4 by striking “2017” in the text on Line 7 of the Form W-4 and entering “2018” in its place and signing the form in 2018; (2) modifying the 2017 Form W-4 by entering “Exempt 2018” on Line 7 of the 2017 Form W-4 and signing the form in 2018; (3) using the 2017 Form W-4 without modification and signing the form in 2018, provided that the employer establishes and communicates to employees a procedure under which an employee signs and furnishes the 2017 Form W-4 in 2018 to certify both that the employee incurred no income tax liability for 2017 and that the employee anticipates that he or she will incur no income tax liability for 2018 and thus claims exemption from withholding for 2018; or (4) any method substantially similar to (1)–(3) that clearly conveys in writing an employee's intent to certify his or her exemption from withholding for 2018.
Employees experiencing a change in status that causes a reduction in withholding allowances are subject to the following specific relief:
The Treasury Department and the IRS have determined that employees experiencing a change in status that causes a reduction in the number of withholding allowances are not required to furnish employers new withholding allowance certificates until 30 days after the 2018 Form W-4 is released. Moreover, because the 2018 withholding tables are designed to work with the Forms W-4 that employees have already furnished their employers, employees who have a reduction in the number of withholding allowances solely due to the changes made by the Act are not required to furnish employers new withholding allowance certificates during 2018. However, employees may update their withholding at any time in response to the Act. Employees who choose to update their withholding may use the 2017 Form W-4 instead of the 2018 Form W-4 to report changes in withholding allowances until 30 days after the 2018 Form W-4 is released. Likewise, new hires may continue to claim allowances by using the 2017 Form W-4 until 30 days after the 2018 Form W-4 is released. Employees who furnish new Forms W-4 using a 2017 Form W-4 do not need to furnish a 2018 Form W-4 after the 2018 Form W-4 is released.
The rate for withholding using the optional flat rate on supplemental wages will be reduced from 25% to 22%. Employers are to implement this lower rate as soon as possible, but in no event later than February 15, 2018.
The notice also clarifies that payors of periodic payments for annuities, pensions and other deferred income who do have a withholding certificate in effect for a recipient are required to withhold on payments, using a married individual claiming three withholding allowances. Note that, as under prior law, if a recipient files an election not to have withholding apply then no amount will be withheld.